Speech

Address to the World Trade Organization General Council, by Anne O. Krueger, Acting Managing Director, IMF

May 18, 2004

Members of the Council, and Dr. Supachai.

I'm delighted to be here this morning. I greatly appreciate the invitation to attend this meeting and the opportunity it provides for me to discuss with you some of the ways in which the International Monetary Fund is seeking to support the Doha process.

My presence here today, and your original invitation, underlines the closeness of our two institutions. The Co-operation Agreement signed in 1996 has, I believe, been a great success. We have different responsibilities, of course, but a shared objective—the expansion of world trade and the rapid growth and rising living standards that this will bring. The more we can work together, the better the chance of realizing our goal.

As Ambassadors to the WTO, you are all much closer to the negotiations currently under way; and consequently better informed than I am. But I think that I have managed to come to Geneva at a propitious moment. There are clear signs of renewed commitment to a successful Doha round outcome: and that commitment is essential for a deal to be struck.

Of course, there are many hurdles still to be overcome. But in his remarks to the meeting of the International Monetary and Financial Committee in Washington last month, Dr Supachai spoke of the intensive consultations under way; and of the constructive and determined manner in which those consultations were taking place. Reports of developments since then have continued to be positive, and there is a real prospect of completing the framework agreements by the summer.

On behalf of the Fund, let me urge all of you to continue the work in this constructive spirit. But lest you think I am here simply as a cheerleader, let me also spell out why we in the Fund think a Doha deal is so important; and where we think we might be able to play a modest role in assisting the process.

The benefits of free trade

This is hardly the place for me to rehearse the benefits to be had from free trade. After all, you are, collectively, the embodiment of the multilateral trading system that has served us so well for nearly sixty years. The rapid growth of world trade in those decades was accompanied by rapid sustained economic growth, rising living standards and poverty reduction. Never before have so many people escaped from poverty. And driving that rapid growth in trade was the process of multilateral trade liberalization.

Launching the Doha round was intended to maintain the momentum established by previous trade rounds and to press on with the lowering of tariff and non-tariff barriers to trade. And the ambitious Doha program went further than previous negotiating rounds in the commitment made to developing countries—indeed, we refer to it as the Doha Development Agenda.

To succeed, Doha needs the support of all WTO members. It deserves this support. A successful Doha round would provide the foundation for rapid and sustainable growth around the world, bringing a continuing rise living standards and further reducing poverty.

Trade liberalization should be embraced enthusiastically. No country has achieved rapid and sustained growth over a long period—with all the benefits that brings—without trade liberalization. Doha offers the opportunity to free many more people from poverty: indeed, it is vital if we are to have any chance of meeting the Millennium Development Goals. It is a win-win situation for all countries—although, as I shall discuss in a moment, there can be some short-term adjustment costs for some.

But, as the communiqué of last month's IMFC meeting pointed out, successful completion of the Doha round is a shared responsibility. The developed countries have obligations, especially with respect to market access and to the reduction of trade-distorting subsidies. But developing countries must play their part, too. The developing world has by far the most to gain from a Doha agreement. The World Bank estimates that around two thirds of the gains would accrue to developing countries.

But it is important to remember that most of these gains will come from trade liberalization by and among the developing countries. Trade barriers between developing countries are significantly higher than those imposed by developed countries.

The role of the Fund

I noted earlier that the Fund's role in the promotion of global trade is different from that of the WTO. But we do have an important role. It is a responsibility we take very seriously.

Trade cuts across many aspects of our work. We firmly believe that trade liberalization can be most effective, and bring the greatest benefits, when carried out in a multilateral framework. But even unilateral trade liberalization brings benefits for the country that undertakes such liberalization.

Our surveillance work provides us with a good opportunity to encourage our member countries to adopt trade policies that are in their best interests. We conduct what we call Article IV consultations every year with most of our members, marginally less frequently for the remainder. Trade liberalization is often an important part of these consultations because it can help achieve the objectives which all our members share—macroeconomic stability, sustainable growth and rising living standards.

When needed, we can also provide technical assistance to those countries that need practical help in creating the right economic framework to encourage growth through trade. We can, for instance, advise on how to replace revenue from import tariffs with revenue from less distorting tax regimes. We now have several regional technical assistances centers, able to provide or marshal more focused advice.

And we can, where appropriate, provide financial assistance through Fund-supported programs.

The need for a new initiative

But can we do more? In the past year or so we have been reflecting on this as we became more keenly aware that there was antipathy in some developing country members to the potential costs to them of a Doha round settlement. In some countries there is concern about the economic impact of preference erosion; or of changes in the terms of food trade resulting from liberalization in export markets and reforms of the subsidy regimes of other countries. In other countries, there is concern about the elimination of quotas on textiles and clothing. Although agreed under the Uruguay Round, this will only come into full effect at the end of this year.

I suppose the doctrinaire response to such concerns is to dismiss them, and to reiterate that free trade is beneficial and desirable.

But that would be wrong. It would also ignore the Fund's traditional practice. We always take the concerns of all our members seriously. If we judge those concerns to be misplaced, it is our duty to explain why—to the satisfaction of our members.

Based on experience with previous trade rounds—and we are going back fifty years or so—there is no question that the overall impact of an ambitious Doha agreement would be positive—and large, for the global economy as a whole and, over the longer term, for virtually all countries. This conclusion is supported by our own research, and that of others.

But some of the concerns expressed by individual countries are understandable, and we have been studying ways to address these. A minority of WTO members might need some assistance initially as they adjust to a more liberal multilateral trading system. They might, for instance, have to cope immediately with the elimination of preferences that affects them disproportionately; and there could be delays before the benefits that flow from a more liberal trading environment start to be realized.

In keeping with our mandate, we have focused on the possible balance of payments implications of further multilateral liberalization. We have examined the possible impact of preference erosion and we expect this to be overwhelmingly concentrated in a small number of products—above all, sugar, bananas and textile products. If we assume an ambitious Doha outcome, we reckon that no more than two dozen countries would experience a decline in export values of 2% or more from preference erosion. In most instances, at least some part of this decline would be offset by increased exports resulting from improved market access for other exports.

It is harder to predict the impact of agricultural subsidy reform on changes in the food terms of trade. But the experience of the Uruguay Round suggests this is not likely to be very large. The consequences of a more competitive environment for textiles exports are even more difficult to judge: but a range of estimates suggest that the impact could be significant for a small number of countries.

But let me be clear. For the vast majority of countries, the benefits of a Doha agreement would be, as they would be for the global economy as a whole, overwhelmingly positive even in the short term. In the great majority of cases, we would expect any balance of payments shortfalls to be small and temporary. Just to take one example: a decline in export income from certain products that currently enjoy preferential market access would not necessarily mean an equivalent impact on the balance of payments: other exports will benefit from the more liberal trading environment.

And even for those members who might be adversely affected in the early stages of implementation of a Doha agreement, the impact is unlikely to last long. In most cases, the phasing-in of Doha liberalization would take place over several years and so allow time for smooth adjustment. And it is important to remember that all countries will gain from the expansion of trade and the consequent impact on global economic growth.

Countries that are in need of temporary assistance would still, of course, have access to all the usual forms of assistance the Fund provides as a matter of course. But we recognize that this, along with the assurances I have spelled out, might not be enough to provide reassurance for governments where there is concern about the economic adjustment needed to benefit from a more liberal world trading system.

The Trade Integration Mechanism

It is to address those concerns that we have developed the Trade Integration Mechanism, or TIM. I first announced this initiative at the Ministerial meeting in Cancun last September. Since then we have been working to flesh out the proposal. I am pleased to say that the mechanism was formally approved by the Executive Board a few weeks ago. I'd like briefly to spell out how it will work.

Countries expecting short-term balance of payments difficulties in coping with the effects of a liberalization in third country markets—either under a Doha agreement or other non-discriminatory liberalization that has similar effects—will be able to request assistance under the TIM. They can do this within the context of an existing Fund-supported program (such as under a standby arrangement, or a program under the Poverty Reduction and Growth Facility) if they already have one. Or they could seek financing under a new Fund arrangement.

Once a request has been received, the next step would be for our staff to make an assessment of the likely size and timing of any adverse economic impact. This "baseline" figure would be used to calculate how much financial assistance might be needed; or, if a country already has a Fund-supported program, how much extra assistance should be provided.

The baseline is important, because if it transpires that the impact is greater than anticipated by this reference figure, the mechanism can provide a country with rapid topping-up, of up to 10% of its Fund quota, without waiting for the regular program review and following simplified assessment procedures. Any larger unanticipated financing need could be considered under a regular review.

Of course, this topping-up provision would relate specifically to the issue of trade liberalization and not to some more general need reflecting, for instance, problems in implementing the Fund-supported program.

Let me say a word about conditionality. This would not necessarily be different under the TIM than under an arrangement that had no TIM element. But where assistance was provided through the TIM we would be looking to encourage countries to adopt the policies needed to enable the economy to adjust as rapidly as possible to the new, more liberal, global trading system. Any agreed topping-up under the TIM would not normally involve additional conditions.

Those countries who might want, and be eligible for, assistance under the terms of the new mechanism will—of course—be interested in the terms on which such help will be available. Where a program already exists, the additional help would carry the same terms. Where a new Fund-supported program is needed, the terms would be those of the framework under which TIM assistance is provided. So, for example, TIM support provided to low income countries through a PRGF facility would usually incorporate a considerable subsidy element.

One important factor to bear in mind, though, is the impact of new assistance on a country's external debt burden. In countries with a precarious debt situation, any non-grant assistance, including under the TIM, would clearly need to be carefully evaluated.

We confidently expect any balance of payments impact to be temporary, while the positive changes in the trading environment will, of course, be lasting. It will be important to structure the help provided under the TIM in such a way that it does not slow the process of adjustment. Anything that delayed the time at which a country was able fully to exploit the undoubted benefits of trade liberalization would be counter-productive. TIM's purpose is to make the transition easier—not to put it off. Ultimately, it is sustainable growth that will bring poverty reduction, and trade liberalization is an important element in driving that growth.

Looking ahead

The TIM's purpose is clear. It is to ensure that the Fund is properly attuned to any need to ease adjustment that might arise during the initial period when a Doha agreement is being implemented. A clear focus on potential problems is important for two reasons: first it should provide reassurance to those governments apprehensive about how a Doha settlement might affect their economies in the short-term; and second, to ensure that the Fund is geared to rapid action both in anticipating needs and in reacting if those needs turn out to be greater than initially thought. It is, if you like, a way of exploiting the Fund's financial resources in a more targeted way in order to deal specifically with what will be a rapidly changing—and I should emphasize a rapidly improving—global trade environment.

When we first started to develop this mechanism, we viewed it rather like an insurance policy. The clear evidence is that only a very small number of countries will ever need the assistance that the TIM offers. But if its existence helps provide governments and policymakers with the reassurance they need, it should make it easier for them to embrace the Doha Development Agenda, knowing that they will be able to exploit the opportunities an agreement will provide, while worrying less about the potential downside risks, however small these are.

Of course, some work remains to be done on the mechanism. In particular, more work will be needed to ensure that the initial assessment calculations can be done accurately and speedily. Much of the expertise for some of this detailed work lies outside the Fund—indeed much of it is here at the WTO, as well as at UNCTAD and the ITC. It makes sense for our institutions to work closely together as we begin to implement the mechanism, and I have asked Fund staff to push ahead as speedily as possible with their counterparts here and elsewhere.

Conclusion

The encouraging developments of the past few weeks have given new impetus to the Doha negotiations. We in the Fund are following events closely. As I said at the outset, we enthusiastically support the goals of the WTO, the progressive liberalization of world trade. We were charged with promoting trade in our original articles of agreement, first set out sixty years ago. Ours is not the central role, but we are determined to do what we can to encourage the process and, through the TIM, remove potential obstacles to a successful outcome.

Ultimately, the fate of the round depends on you. I wish you all success.

Thank you